Italian Power Exchange and unilateral market power in Italian wholesale in electricity market

Italian power exchange and unilateral market power in Italian wholesale electricity market (Rossella Baselice) - This paper analyses the Italian wholesale electricity market with the aim to evaluate if it suffers from unilateral market power, namely firm’s ability to unilaterally increase prices above a benchmark price level in a profitable manner with profit increases stable over time. Though the study concerns unilateral market power, it is important to consider possible interaction among firms, due to the characteristic of electricity of being a homogeneous good. In this context, a useful approach to measure market power implies the analysis of each firm’s residual demand, defined as the total market demand less the sum of the rivals’ supplies. In this way, we are able to study the relationship between firm’s price and quantity, taking into account rivals’ reaction function. The analysis is conducted using data collected and published by the Market Operator, GME. The data refer to bid offers submitted by generators to the Day-Ahead Market during the first 4 months of functioning of the Italian Power Exchange (IPEX). The bid data are processed to provide geographical relevant markets and an appropriate algorithm enables us to analyze the zonal data in order to construct the individual ex-post residual demand of the generators for the hourly zonal markets. We then calculate the price elasticity of the each curve evaluated at the equilibrium market price. The inverse of the elasticity gives the Lerner index, the extent to which every supplier is able to raise the hourly price above his marginal costs. Averaging over hourly values provides us with measures of unilateral market power exerted by each generator over the analysed period. The results suggest the generators exercise market power. In particular, although the liberalization, Enel Produzione is still the most important generator, with a Lerner index noticeably higher than the rivals in all market zones, except Sardinia, where a duopoly exists with Endesa playing an important role as much as Enel. The results are confirmed by the joint study published in 2005 by the Italian Antitrust Authority and the Energy Authorities, followed by actions taken by the Antitrust Authority in order to promote greater competitiveness on the Italian electricity market. Key words: Wholesale Electricity Markets,

Rossella Baselice, Italian Power Exchange and unilateral market power in Italian wholesale in electricity market in "ECONOMIA DELLE FONTI DI ENERGIA E DELL’AMBIENTE" 1/2007, pp 81-99, DOI: